Sunday, March 29, 2009

We Are So F*#@ed

Are you an American? Or maybe you just live and work in the USA? Or maybe you live elsewhere, but hold US dollar-denominated assets? If you answered yes to any of these, follow-up question: have you been feeling optimistic lately? Yeah, well, snap out of it now. Timmy and the Lords of the Underworld - Tim Geithner, Ben "Helicopter" Bernanke, and our glorious POTUS Obama - have just pillaged and raped you in a manner and to an extent that would make flagellum dei Atilla the Hun and Genghis Khan look like benevolent amateurs, and Bernie Madoff like a harmless two-bit hustler. John P. Hussman describes the PPIP - Public-Private Investment Program (I am not even gonna try to ponder what genius came up with the "public-private" oxymoron) well here. The key number from his excellent analysis: $10-14 trillion - the amount for which US taxpayers have been put on the hook for. Feel raped yet? And no lubrication is forthcoming, mind you. This is a pretty conservative estimate, which, somewhat implicitly, assumes that housing prices have bottomed out. Is that so? Subprime mortgages have by and large already reset, and it is believable that we have seen the worst of the foreclosures from those. However, the option ARM's and Alt-A tsunami is about to hit, and hit hard, and that's not even giving a thought to commercial real estate.

In Retard Timmy's parallel universe:
1) The banks are not lending.
2) They are not lending because they are stuffed up their eyeballs with bad assets.
3) The assets are bad because the market does not appreciate that they are actually good.
4) Ergo, if the banks are helped to unload those assets, they will lend again, and the economy will recover.

In our universe, meanwhile, the banks are lending, just not quite as much as before, mostly because they have come to the realization that lending to borrowers who are unlikely to repay is not all that smart. What is not "lending" is the securitization markets, which at the peak of the craze provided more funding to the economy than the banking system. Good luck reviving that charred corpse. Also in our universe, the bad assets are really pretty damn bad.

Oh, wait, you do not feel royally screwed yet? Here's an example of how the PPIP will work, with made up, but plausible numbers. Bank X holds a boatload of bonds that the market values at 25 cents on the dollar. The Fed and the FDIC give investor Y (not you or me, there are requirements to qualify - $500 mln in private capital and $10 bln in eligible assets under management) non-recourse loans so Y can leverage 6:1. It may actually be 12:1, since the rules are a bit unclear, but let's assume 6:1 - that's horrible enough. Thus, if Y buys the junk for 70 cents on the dollar, he/she puts up 10 cents, and the taxpayer is shafted for the rest. The 10 cents is Y's maximum loss, and that's if the asset goes down to zero in value. There is very little to prevent X from lending Y the money for this - in fact about the only protection is "Asset managers may not purchase eligible assets from sellers which are affiliates of such asset manager or of any private investor which has committed at least 10% or more of the aggregate private capital in the PPIF." Some protection. Thus, if the market's current valuation of 25 cents on the dollar is correct, 45 cents of loss is realized, and the US taxpayer eats about 38.5 cents of that.

I do not know about you, but I want to see Timmy and the Lords of the Underworld swinging from the nearest lightpole, although I would compromise and travel to Washington, DC to watch.

Sunday, March 22, 2009

Dr. Laffer on Tax Rates

It should not be a hard concept: if you increase tax rates to punitive levels, the ones who pay the most tax would find ways not to pay, be it legal backdoors or outright relocation. Quote: "Laffer readily admits that middle and lower-income folks lack the flexibility of the rich when it comes to changing behavior in response to changes in tax rates. Where the rich can shelter, defer and give away income, taxpayers at the bottom rung are like lambs going to the slaughter. Raise tax rates, and they fork it over to the government. Lower tax rates, and the government gets less revenue."

Quite so. I would contend, however, that the middle and lower income folks have a different weapon at their disposal - numbers. If they were to simply start massively underreporting income, they would be in theory criminals, but the government would not have the means to enforce, and most singular audits, let alone lawsuits, would not be cost efficient for the government. The bureaucrats may know Joe Average is screwing with them, and this may get any single Joe in trouble, but not any reasonable number. As it is, the IRS audits approximately 1% of individual returns, with a heavy focus on those with "red flags" - tax shelter investment losses, complex investments, large business expenses relative to income, tax transactions without explanation, etc. Thus, Joe Average is (mostly) safe, and the government is reduced to raising the rates on the "low-hanging fruit" - the wealthy and the corporations. This is precisely the counterproductive thing to do. Quote #2 from the above article: "If the government is truly interested in maximizing its revenue, not in redistributing income, it should cut taxes on the rich. Blasphemy, I know."

As Churchill put it, "If you destroy a free market, you create a black market. If you have ten thousand regulations, you destroy all respect for the law." Transocean, Weatherford, and Tyco are just the pioneers moving to corners of the world where capital is treated with respect, not villified and extorted.